Big Networks as an Unfair Advantage
I’ve been hearing over and over again to stop focusing on revenue, and to focus on user growth instead. Or, as Union Square Ventures famously puts it: “create large networks.” The core idea really makes a lot of sense.
Your biggest unfair advantage at this stage is you literally own the market.
Well, think about it. When you’re that big, nobody can touch you. Yet…
- Facebook overtook MySpace.
- Google overtook all the other search engines.
- Android overtook Symbian.
- And there are countless other examples.
So, what happened in all these cases? Speaking from a high-level, these “smaller” guys simply came in and created a more useful product while the “bigger” guys had their guard down. Facebook was much less spam-orientated then MySpace was. Google had much higher relevance than Yahoo. Symbian was just an awful mobile operating system to begin with.
The Internet makes it easy to scale your audience quickly. There are many available distribution channels that, with the right exposure, can explode your audience to 10 million users in a week. This doesn’t mean people aren’t going to compete with you. In fact, it may create much more competition as entrepreneurs see how large your audience is and how you’re sitting there with an unpolished product. This is basically what happened in all the examples above.
The core considerations for a tech startup (in my opinion) are:
- Usefulness of the product.This is number one! Don’t worry about blowing up to a million users right away. If your product isn’t useful enough, people will not pay you money for it or continue to use it. When you think of most of the products you consume, I bet you’d classify them all as useful. That cup of coffee in the morning increases your productivity. Tylenol gets rid of your headache. GitHub allows you to store your source code so you can add a new team member to a repository quickly and painlessly. Basecamp allows for organized team and project management. Yet, so many entrepreneurs build products that their audience could live without. Sean Ellis’s model of only scaling after 40% of your userbase say they cannot live without your product, is a great way to detect how useful your product is.
- Revenue. Obtaining revenue should never be of focus until you’ve built an extremely useful product and 40% say they can’t live without it. As entrepreneurs, it’s sometimes easy to delay revenue, because we’re worried we may alienate our users or we might just go raise a round of financing to give us more time or we might spend time adding more features that really add no value. But, revenue is extremely important. It lets you start re-investing into the business and it gives you a baseline number. If you don’t have revenue, you may be scrambling to raise money to keep the lights on. If you have revenue coming in, you don’t have to worry when you’re lead investor backs out when you’re trying to raise $24m. As soon as you start attempting to generate revenue, you can start extracting numbers like conversion rate, revenue per user, churn rate, and lifetime value. You have the baseline, so your team can start figuring out ways to manipulate these numbers.
- Organic Scale. This may be the least talked about area in startups, in fact I’m not sure I’ve ever heard anyone talk about it. There are some very big companies out there, which seemed to have worked really hard and just exploded over time. They can’t really articulate what happened other then they built a great product and kept improving it. Maybe it was some big change in their funnel that increased their conversion rate. Maybe it was some huge business deal that generated massive exposure. 37Signals, GitHub, and Facebook are prime examples. A lot of their growth falls under organic scale.Organic scale would be defined as:
- Recurring Revenue: requires some monthly or yearly fee for continued use
- Recurring Usage: a product that a user frequently uses and has great retention
- User-generated Marketing
Basically, if you have one of these systems in place, one of your core metrics should grow up and to the right, with very little effort. Contingent on that, your product remains useful over time. Innovation can be short lived sometimes. Implementing organic scale into all of our startups has been our prime focus in 2012.
So don’t think because you’ve grown to a million users that you’re going to be the next Instagram, when you might end up like MySpace…
Raising Capital
A few months ago, I travelled around several tech hubs in Canada and the United States with Seedcamp. My objective on that trip was to learn about and evaluate the process of raising capital for a start-up company. I have to admit that I was hesitant to go, simply because our team is not looking to raise a round for Compilr for at least another 4-6 months.
As entrepreneurs, we are becoming increasingly better sales people. It’s easy to quickly identify the points of your business that make people say “wow” and to reinforce them to anyone you meet. Investors, on the other hand, are tough nuts to crack. It was interesting, to watch how investors interacted with our pitches. I was paying close attention to their tone, body language, and facial expressions. These investors have heard hundreds of identical stories . . . Entrepreneurs with big dreams and big numbers that mean nothing unless those numbers are compounding quickly and the product is showing signs of great usage.
During my trip, I found out a few things that you might find interesting:
- Most US investors don’t invest outside of their geographic location.
- It takes much more than a week to sit down with the Venture Capitalists (VCs) if you want to get anywhere.
- A number of VCs said the fundamentals of investing for them have changed in the last 12 months. There is a huge surplus of angels (all the recent IPOs) and startups (500 startups, Seedcamp, Y-Combinator), so now they expect a traditional startup to come to them with HUGE growth and HUGE traction.
- All you need is one investor to pull the trigger. Once one says yes, they’ll bring their friends in.
If I were to start a company today that required significant capital, my process would look something like this:
- Build a demo product, as cheaply as I could, and get a few users on board. Then I’d go out and find a technical co-founder to work on the product full time in exchange for vested equity. It works out better, in this case, for the original founder because he or she doesn’t need to give up so much equity since he already has a demo built.
- Try to raise $250K to $1m as an angel round from wealthy investors. This funding would take the rough demo and create a more polished product, moving towards a product that 40% of your userbase can’t live without. After this stage, work out the economics and optimizing my funnel as best as I could, before taking another round.
- Scale and get fat. By this point, I should have a product with a very apparent business model and clear idea of the target audience. My next step, would be to raise a much larger round to scale this business and acquire as many of that target audience as possible.
I’d only follow these steps if the market I was going after was big enough. If the market is small and the product really only has the potential of doing sub-$5m in annual revenue, I would try to hold off raising any capital for as long as I could, possibly indefinitely.
What do you think? Would you change that process at all?
About Startup Clones
Fred Wilson blogged about startup clones and how USV typically avoids funding them. He says it kills creativity.
Clones are laggards. They are always a few steps behind the leader. Kind of like your old elementary schoolmate, who used to copy your answers to at least achieve 80% of your grade.
Clones can only clone your product, which in reality is a very small portion of your business. They can’t clone:
- • Your marketing channels
- • Your business partners
- • Your stickiness
- • Your usage patterns
- • Your K-Factor
- • Your SEO
- • Your Loyal Customers
- • Your Conversion Rates
- • Your Sales Process
- • Your Personality
- • Your Team
Be grateful you have a clone to compare yourself against, to prove why you’re the obvious choice. If your clone ends up beating you, then you sucked at all the above and deserve to lose your title as leader.
How a Canadian Company Took an Investment From a European Incubator?
In early 2011, I met an entrepreneur and angel investor from London, at a Starbucks in my small province. He literally just took the red-eye from London, I could tell by his blood shot eyes. He wanted to know what I was working on and I explained, an “online IDE for programmers”. I could tell immediately he didn’t know what an IDE was…
Talk about a pivotal experience. I was a programmer turned marketer, yet I still used very technical terms to describe what I was working on. The angel investor looked at me with a blank stare; he didn’t understand exactly what I was working on.
After another couple of minutes of questions, I explained and tweaked my value proposition. He finally understood what I was working, but exclaimed that I definitely need to work on my non-technical elevator pitch. Naively, I responded I’ll never need to pitch to non-technical people.
Now, I know that a non-technical pitch is critical. You may end up with non-technical investors like doctors, who will want to brag to their friends what they are investing in. You don’t want to put your doctor in a situation where they can’t explain exactly what you’re product does, killing viral potential. This is sometimes the case, because the investor is more in love with the team than the product.
After this, he explained an incubator from London was putting a session together in New York. The incubator was called Seedcamp. I’ve never heard of them before, I looked at them online, saw they had invested in a several companies and were considered a European Incubator. They definitely didn’t have any credentials like Y-Combinator or Techstars. In fact, the only acquisition that I saw, to date had been Mobclix.
I decided to apply to Seedcamp anyway since it New York was literally a 2 hour flight (I had never visited New York, gave me an excuse). Plus it was at Google’s office in New York. Our product, Compilr, was definitely potentially a product to someday be acquired by a company like Google, Microsoft, Salesforce, Facebook, and the list goes on. Any visibility I could get at this stage was definitely worth it.
Compilr was accepted to present in New York to the Seedcamp list of mentors. We presented at Google’s office in front of 100 mentors or so. Presenting in front of 100 people was definitely not on my bucket list, but I got through it. It actually has helped in a lot ways. I’m definitely not worried presenting in front of 100s of people as much as I thought.
The day after, Compilr was invited to pitch to some of Seedcamp’s core investors. The room had maybe 15 people but I was more nervous than the day before. In all honesty, I thought I blew it because I was being asked a ton of questions. I answered them all, but Carlos, one of the main guys from Seedcamp had asked a question and I got sidetracked with an answer, when someone basically said “Well, ok thanks for your time, we’ll be in touch.” I still feel like a total d-bag because I didn’t answer his question…
At this stage I became defensive in my mind, even though I hadn’t received a yes or no to their investment. In reality, I didn’t care if I received Seedcamp’s investment or not. Personally, I was funding the company out of my own pocket, almost $150,000 a year, their small investment would only really marginally accelerate my company. I was hoping to get visibility in front of the right potential acquirers.
A few weeks later, I was in total shock when Seedcamp told me they were willing to invest in Compilr. Even though, I personally felt like I blew the follow up meeting in New York. When I told several of my advisors, most of them were eager for me to take the funds. While some opposed to the idea, stating the same facts I alluded to earlier, only one successful exit, etc…
Our team decided to go ahead and take small investment from Seedcamp to use towards accelerating our business. Our end goal was that Seedcamp would present our company to potential acquirers like Facebook, Google to hopefully stimulate an exit, producing a positive ROI for them.
SIDE NOTE: When we originally pitched to Seedcamp we had 45,000 users. Today almost 5 months after we have over 75,000 users.
Follow up on your churned accounts!
Lately, I’ve noticed a scary trend with a large amount companies… If at some point I was paying for your services but recently decided to stop paying, you’re not following up to find out why!
Some of these companies we were paying $200+ a month for their services. One company we were spending six-figures a year on advertising… You’d think at least one of these companies would have immediately followed up with us to find out what happened! But most companies seem to think, oh well we lost one paying subscriber; let’s just find a new one.
This attitude needs to change! I would have loved to tell my pain points to the number of companies we’ve begun to cut out of our life in the past 6 months. However, I haven’t been given the opportunity to do so, and our team is moving on!
Follow up on your churned accounts – or die!
Our New Office
This year we are looking to hire a few new engineers to our team. As such, we need to upgrade our office space. Our current 150 square feet wasn’t cutting it. Our new office has over 500 square feet and has features such as our own conference room, blackboard wall and white board wall. On top of this, we wanted to create our own desks that will slide up and down the wall, to allow our team to stand for a few hours every day and stretch out that spine. We’ve even got a brand new Xbox 360. If you’re interested in joining our team, shoot us an email.
How $500 saved my company over $10,000
Every year around Christmas time, I like to reflect of those who helped my company grow over the past year. Everyone from employees, friends, family to my professional team are evaluated. Last year, was very exciting. We had to restructure the entire company from the ground up. In the same year, my business partner and I made our first rental property purchase.
It turned out to be an expensive year for us in the legal and accounting department. However, the advice I received continues to pay itself out in dividends. And because they helped so much, I decided to invest $500 to buy them gift certificates at some local restaurants.
Everyone loved the certificates. My real estate lawyer phoned us up right away to thank us and I could tell there was definitely excitement in her tone. But, something more amazing happened that was completely unexpected. Suddenly when they were asked for advice they would rarely send an invoice for their time. Overall this year it has already saved us over $10,000. Good lawyers, good accountants are very expensive!
Small gestures like this, can really help your business. Keep in mind if you are being too frugal, it may hurt you in the long run.
How much traffic did Humble Bundle send us?
Almost two weeks ago, one of our startups, Compilr.com, became a top contributor on Humble Bundle. Our goal was to get in front of indie game developers with our recent XNA release. Let’s take a deeper look and see if we got the exposure we wanted.
During Humble Bundle, we saw our traffic increase 84.79% and our number of page views increase 51.11%. A huge increase in traffic, however there were a lot of people just exploring. Our bounce rate and average time on website dropped significantly.
We averaged about 50-80 additional signups per day, resulting in about 840 new accounts directly from this campaign. In total we ended up paying about $593.21 to stay ranked as a top contributor. We felt we would get the same exposure whether we were ranked number 1 or 10. It would be interesting to compare our data with MtGox.com who paid $4,096 to get first position.
If you work out the math we ended up paying:
- $0.71 per user acquisition
- $0.13 per visit
All-in-all it ended up being a great investment and some of it even went to charity.
This should be testament to always be on the lookout for alternative advertising.
Your Analytics is missing tons of data!
With the proliferation of new devices like smartphones and tablets, you’re probably losing a lot of useful data. The worse part of it is you probably don’t even realize it.
Here’s the scenario. Let’s say John finds your website by clicking on a pay-per-click ad for the keyword “mp3 player”. He finds the mp3 player he’s looking for on your website, but the price is a little steep so he’s going to have to check in with the wife before such a large purchase. He abandons your shopping cart.
Later that evening he gets the OK from the wife and decides to make the purchase. Except he throws your analytics a curveball… He goes back to your website from his iPad and makes the order.
From the scenario above, you have several problems with your analytics. John now appears as two different visitors in your analytics, one that completed a conversion and one that didn’t. The worse part is the conversion wasn’t completed in the funnel you paid advertising dollars for.
The original way John found your website was clicking on the ad for mp3 players, which cost you money and lead to no conversions. This can lead you believe your advertising campaign is losing money and ultimately cause you to turn off the ad.
You may think this doesn’t apply to you, because it may be an unlikely scenario. Here is a really likely scenario because so many users have email setup right on their smartphones. A user comes to your website from their PC then signs up to your newsletter. A week later you send out a new email newsletter, the user opens it from their smartphone, makes a purchase. Once again you can’t track the original way the user came to your website.
It’s imperative that you try to come up with a solution to replicate critical session data from one device to another to increase the amount of good accurate data in your analytics. If not it will affect how you are tracking your ad performance and even any split tests that may be running.
Why are we a top contributor on Humble Bundle?
If you haven’t heard, Humble Bundle is back. You can buy several indie games, donate to charities and pay whatever you wish. Our team decided to make a purchase, enough to become a top contributor. But why would we shell out $543.21 just to become a top contributor?
- We love supporting great ideas and those who execute them. Humble Bundle is a novel idea. It supports charities and indie game developers. Lots of indie game developers have limited distribution channels, so this adds to their arsenal and adds to their revenue stream.
- They support charities like EFF and Child’s Play. Both great organizations. The great aspect of Humble Bundle is you can choose exactly how much money you want to go to these charities. It is very transparent. This reassures us that our money is (hopefully) going to the charities, especially when there has been speculation of other companies taking advantage of donations.
- Games are awesome and indie game developers are awesome-er. Back when I was 14 I had my first indie game published and it was a thrill. My roots are in indie game development. Our team is really excited in exploring this space again.
- We love trying new marketing strategies. While other contributors are promoting their Twitter accounts, we are actually promoting one of our startups, Compilr. One of our largest market segments is indie game developers and we just launched XNA for C# and VB. It just made sense to us. We will definitely share some numbers from the traffic we receive and break it down once we have enough data.
Ninja Otter
- Big Networks as an Unfair Advantage
- Raising Capital
- About Startup Clones
- How a Canadian Company Took an Investment From a European Incubator?
- Design Matters: And We’ve Got The Numbers to Prove It
- The Importance of a Good Logo
- Follow up on your churned accounts!
- Understanding How Long Your A/B Test Is Going To Take
- Our New Office
- How $500 saved my company over $10,000